This article first appeared in The Edge Malaysia Weekly on February 19, 2024 - February 25, 2024

AFFIN Bank Bhd expects its wholly-owned Islamic banking subsidiary, Affin Islamic Bank Bhd (AIBB), to account for at least half of the group’s overall bottom line by the end of 2028. This is in line with a concerted effort by the group to drive the Islamic business harder, AIBB’s CEO Datuk Syed Mashafuddin Syed Badarudin says.

“By the end of 2028, we want to consistently contribute at least 50% of the group’s profit before tax. The contribution of our PBT after zakat to the group in the last few years has been at between 20% and 55%. In 2023, it will probably be more than half, but our target is for at least 50% consistently. I think that alone is good testament that the group is giving priority to Islamic financing,” he tells The Edge in his first interview since taking the helm in November 2022.

AIBB’s earnings growth will be driven by its efforts since late last year to focus on higher-margin financing such as personal financing, education financing and certain types of secured financing, Syed Mashafuddin says.

“These are the ones that have been lucrative, and we expect them to continue to be lucrative. We want to ramp up the personal financing side, especially. It is about RM2.8 billion, or 10% of our financing portfolio [of RM28.13 billion as at end-September 2023], so that in itself tells you that there is an opportunity for us to raise the bar. We’re talking to our sales people, our personal financial consultants on how to [zoom in on] opportunities outside of the central region, such as in Penang, Johor and East Malaysia,” he shares.

It will also continue to grow home financing, which makes up the biggest part of its financing portfolio. “We believe that the property market is starting to turn for the better, and investors are starting to come back in. But for now, because the margins are better in other areas like personal financing, that will be the focus of AIBB.”

He is quick to add, however, that in the lender’s pursuit to ramp up these higher-margin but relatively riskier financing, it will ensure that its asset quality continues to remain robust.

“I have to emphasise that we have worked very hard … to make sure that our credit underwriting standards and our risk management policies and processes are strong. Hence, you can see that our gross impaired financing (GIF) ratio is lower than the industry’s,” he remarks.

AIBB’s GIF ratio stood at 0.97% as at end-September 2023, well below the Islamic industry average of about 1.28%, but nevertheless higher than what it was (0.84%) a year earlier. It aspires to maintain it below 1% this year and the next, even as the industry’s ratio is seen moving up slightly amid growing macroeconomic headwinds.

On the whole, AIBB is targeting for financing growth of 14% this year and the next, which is double that which is expected for the industry. For the year to Sept 30, 2023, AIBB’s financing had grown 7.3%.

The bank is also looking to crank up its trade financing income as well as fee income from wealth management.

For the first nine months of the financial year ended Dec 31, 2023 (9MFY2023), AIBB reported a PBT after zakat of RM218.7 million, which has already surpassed the whole of FY2022’s RM173.1 million. It is likely that the bank, which had been aiming for a PBT after zakat of over RM300 million for FY2023, is headed for a record-high performance for the full year. The Affin group is slated to announce its full-year earnings on Feb 26.

Syed Mashafuddin says AIBB is targeting a higher PBT after zakat of about RM400 million in FY2024 which, if achieved, would translate to the bank seeing a five-year compound annual growth rate (CAGR) of 42.4% in the five-year period from FY2020 to FY2024.

Sarawak will be a major focus as AIBB looks to expand its business beyond the Klang Valley, Syed Mashafuddin says.

The move comes as Sarawak is poised to become a significant shareholder of Affin Bank. The Edge reported earlier this month, citing sources, that the state plans to increase its stake in Affin Bank to around 30% from 4.8% currently and that the proposal is now pending Bank Negara Malaysia’s approval.

“In terms of branches, we hope to be a lot more present there. As a group, we now have six in Sarawak, and we want to add another six by the end of 2025. We also want to add another four in Sabah [by then], from five currently. Our focus will be across the board, from retail, enterprise [where the SME business is housed] as well as corporate banking,” he says.

While the entire banking industry struggles to grow net interest margins (NIM) amid higher cost of funds, especially in the Islamic space, AIBB is aiming for its net profit margin — the Islamic equivalent of NIM — to expand to about 2.1% this year. Its NPM stood at 1.79% as at September 2023, down from 2.42% a year earlier but up from 1.69% in the three months earlier.

Syed Mashafuddin is confident that this can be achieved as the lender continues to ramp up CASA (current account and savings account) deposits — a cheaper source of funds for banks — even as it reduces its dependence on chunky but more expensive deposits from institutions, government-linked companies and corporates, and focuses on higher-margin financing.

Its ratio of CASA to overall deposits has grown to 27.1% as at 3QFY2023 compared with just 20.8% in FY2019. It aims to have a CASA ratio of about 30% this year.

It will be a tough task, considering that other lenders are also chasing CASA to reduce their cost of funds, but Syed Mashafuddin believes the group’s edge lies in its customer service.

“Our net promoter score (which is based on customer feedback) for the group has been about +69, which has improved from +27 in 2018 and -19 in 2017, and is also better than many banks’. This give us comfort that our personalised service, customer experience, is a lot more positive than before and we want to build on that,” he says.

What is interesting about Affin Bank is that, in the last few years, over 40% of its total loan/financing portfolio is made up of Islamic financing — one of the highest rates in the industry. This shows that the growth of its Islamic financing, via AIBB, has strongly outpaced that of conventional loans.

Affin Bank’s Islamic financing composition stood at 45% as at 1HFY2023, according to Syed Mashafuddin, and he aims to take it up to at least 50% by the end of 2028. There are only two other domestic banking groups with an Islamic financing composition of at least 40%. Malaysian Banking Bhd (Maybank), which owns the country’s largest Islamic bank, Maybank Islamic Bhd, had an Islamic financing composition of 45% as at 1HFY2023, while RHB Bank Bhd’s was at 40%.

Affin Bank’s Islamic deposits composition is also one of the highest in the industry at 40%, compared with Maybank (41%) and RHB Bank (37%) as at 1HFY2023.

He says AIBB’s Islamic business growth will be driven by the group’s “Islamic first” strategy — a practice of many banks in which Islamic banking products are offered to customers first before conventional products, in a bid to ramp up the business — as well as its shift towards dual-banking branches in 2020, and its new mobile banking app that was launched last October.

“As a group, we have 120 branches and if you walk into any branch now, we can sell both Islamic as well as conventional [products]. In the past, AIBB had its own branches, but we’ve now collapsed them into a dual-banking branch model, and that has worked out to be very positive for us,” Syed Mashafuddin explains. At present, there is only one standalone AIBB branch, which is at the Management and Science University in Shah Alam.

Fitch Ratings, in a Feb 6 report, notes that the share of Islamic financing in Malaysia rose to 42% of domestic banking system loans, from 41% at end-2022, as banks continued to champion an “Islamic first” strategy.